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G-20 is right to say cooperation and reforms are the way forward. But difficult choices lie ahead.
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G-20 is right to say cooperation and reforms are the way forward. But difficult choices lie ahead.
At its meeting in Sydney, the G-20 put in place targets and proposed policies for both advanced and emerging economies based on a paper prepared by the IMF. The paper argues that global activity has picked up, largely on account of the advanced economies. At the same time, in many emerging markets, despite a boost to output from stronger exports, domestic demand has been weaker than expected, reflecting in part tighter financial conditions. After the US Federal Reserve’s taper talk in May, there was a new bout of financial volatility. The paper argues that emerging economies with relatively high inflation and current account deficits saw the largest asset price declines initially. More recently, markets are showing signs of stabilising, on the back of actions by key emerging economies to shore up confidence and strengthen their policy commitments. India, for instance, has seen a focus on fiscal consolidation and forex reserve buildup.
In terms of the forecast, it is believed that in the advanced economies, less fiscal consolidation and relaxed financial conditions will support growth this year, while the near-term prospects for the emerging economies are broadly unchanged. Thus, global growth is projected to increase to about 3.75 per cent in 2014 and 4 per cent in 2015. But the recovery is still weak. Capital outflows, higher interest rates and sharp currency depreciation in the emerging economies remain key concerns and persistent tightening of financial conditions could undercut investment and growth in some countries. The G-20 needs cooperation to promote financial stability and ensure a robust recovery. It is argued that the advanced economies should avoid the premature withdrawal of monetary accommodation and cooperate on unwinding quantitative easing. In the emerging market economies, credible macroeconomic policies and frameworks are recommended. Further policy actions should be undertaken to reduce unemployment and strengthen medium-term growth, while making it more balanced. Competition-enhancing product market reforms, infrastructure investment and labour participation reforms can ensure sustainable medium-term growth.
While no one doubts the wisdom of better cooperation and reforms, there is little in the G-20 framework to, for instance, make the Fed take account of the impact of its actions on the emerging markets. The primary responsibility of the Fed is to meet its domestic targets. While it can give better forward guidance, cooperation is a different game. Similarly, the emerging markets can undertake fiscal consolidation and build infrastructure but there are political difficulties in this strategy and in a time of slow growth, which is likely to continue, these choices will not be easy, howsoever obvious they sound in the G-20 policy announcements.
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